Ontario hopes deep budget cuts will calm debt markets

Ontario budget: Province hopes deep cuts will calm debt markets

It is a budget aimed at pleasing almost no one, except perhaps Ontario’s creditors.

With its much-anticipated 2012 budget, the Ontario government seeks to repair the province’s deteriorating fiscal position, chip away at a debt burden headed toward unsustainability, and avoid a downgrade to its credit rating.

A mix of cost controls and revenue increases will eliminate the $15.3-billion deficit over the next six years and meet “the needs of markets,” Finance Minister Dwight Duncan said in the provincial legislature Tuesday.

“We have to achieve these fiscal numbers,” Mr. Duncan said. “It’s the right course of action to follow; it’s the one that will get us back to balance.”

The move towards fiscal retrenchment will inevitably be deemed both insufficient and excessive.

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The austerity plan is one in which all sectors share the burden of restoring fiscal balance, including the business community, Mr. Duncan said.

The government will freeze corporate income tax rates at 11.5%, scrapping its plan to reduce rates to 10% by next summer. And a new jobs and prosperity council will conduct a review on business subsidies.

According to the budget papers, the tax burden on businesses has been reduced by $8.5-billion annually through the introduction of Harmonized Sales Tax credits, the elimination of Capital Tax and the reduction of the corporate tax rate from 14% in 2009.

Consequently, the investment climate in Ontario has improved, according to the budget. Corporate profits increased by 19.1% in 2010 and 13.8% in 2011.

Even so, Mr. Duncan said Canadian employers recognize the need for shared sacrifice.

“We want to see a balanced approach to balancing the budget, to look at revenue and spending,” she said, adding she’s not sure the government has struck the right balance. But she reserved judgment until she consults the party’s supporters.

That consultation may ultimately determine whether opposition MPPs defeat the minority government over its budget.

But on the international front, the key arbiter of the budget’s strength will be the investment community. Last December, Moody’s threatened to downgrade the province’s credit rating, stating “increased fiscal discipline will be required to sustain debt affordability” in Ontario.

A debt cut from Moody’s could still be on the way and would likely raise Ontario’s debt servicing costs. If cuts stunt growth more than expected and the province is forced to pay a premium to fund its deficit, a European-style debt quagmire would not be unheard of.

Like in Europe, the urgent need for austerity has been pressed on Ontario. The provincial debt burden is currently estimated to be $237.6-billion, according to the budget. Given forecasts for economic growth, debt to GDP is to continue to rise to a peak of 41.6% in 2014-15.

Servicing costs on its debt constitute the province’s third biggest expenditure at almost $10-billion annually.

The proposed cost savings over the next three years amount to $17.7-billion achieved mostly through slowing the rate of growth of program costs and through “compensation restraint” for school boards, physicians and public servants.

Actual program spending cuts could total $4.9-billion. Separate legislation will be aimed at pension reform.

Those cuts fall short of those recommended by Don Drummond in his review of Ontario’s finances. The deficit would rise to $30-billion by 2017-18 without those cuts, Mr. Drummond warned.

“We didn’t agree with him on that,” Mr. Duncan said. Some of the recommendations the province rejected, others are still under consideration. And Mr. Drummond didn’t address possible increases to revenues, he explained

“This does more than achieve what Mr. Drummond (recommended),” he said.

Mr. Hudak said the budget demonstrates a failure to understand the “connection between fiscal responsibility and economic confidence.”

Ontario’s deficit is now three times larger than the budget shortfall of all other provinces combined, he noted.

Even under the Liberal plan, next year’s spending gap will decrease only marginally to $15.2-billion, Mr. Hudak said. “Capital is mobile. It won’t go to places that have high debt and it won’t go to places with high taxes.”

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